Investors in the United States faced a nasty shock this week as fresh data showed economic growth slowing and inflation stalling.
Personal consumption expenditures (PCE), a measure of inflation targeted by the US Federal Reserve, suddenly stepped up to 3.4% in the first quarter of 2024.
This rate peaked at 7.7% in early 2022 and had been below 2.6% for the past three quarters.
At the same time, economic growth tumbled to 1.6% when economists had been expecting something closer to 2.4%.
These are preliminary numbers which will be revised, but they reinforce a gradual realisation that the battle against inflation still hasn’t been won — even in the United States.
Here in New Zealand, market expectations of future interest rates have taken another step closer to the Reserve Bank’s hawkish projections after the Consumers Price Index (CPI) data release last week.
The headline rate was 4% in the March quarter, 0.2 points above the Reserve Bank's forecast, although it has been trending downwards.
Non-tradable, or domestic, inflation landed 0.5 points above the central bank’s forecast at 5.8% with housing costs and cigarette taxes still increasing.
It shouldn’t have changed anyone’s view of the world, BNZ’s head of research Stephen Toplis said, but it did shift market pricing of interest rates.
ANZ analysis showed investors were pricing a full rate cut by October prior to the data release. That has now been pushed back to November, which is when economists also expect a cut.
Market pricing tends to predict earlier cuts than economists’ forecasts as the benefits of being early can outweigh the risks of being wrong.
It also shifts around more than official forecasts do. At the end of 2023, traders were positioned for the first rate cut to occur this May — which no longer seems plausible.
Adrian Orr, Governor of the Reserve Bank, has repeatedly warned that getting inflation from over 7% to under 4% would be the easy part, and the “last five yards” would be harder.
New Zealand is now in those final five yards. Statistics NZ’s measure of core inflation, the trimmed mean, suggests prices have risen about 1.5% over the past six months.
That would mean an annual rate of about 3% in the September 2024 quarter, and a headline rate of 2.2%, if prices simply continued to increase at the rate seen in the past six months.
One might expect the central bank, once back in its target band, to cut rates quickly, especially as monetary policy changes can take 18-months to fully be felt in the economy.
The experience in the US shows that inflation can bounce out of the target band and the Reserve Bank wants it back at the 2% midpoint. That’s one reason to be cautious, but there are others.
One is that it is not clear exactly how much current interest rates are restricting the economy.
A recent bulletin published by the Reserve Bank reviewed its estimates of the neutral interest rate and found a significant difference between long and short term rates.
It said the short-term nominal rate was most useful for thinking about whether the Official Cash Rate, currently 5.5%, was contractionary in the current period.
The mean estimate for the short-term rate was 3.9%, compared to the more-often cited long-term neutral rate which was 2.6%. Both have been rising after decades of decline prior to the pandemic.
Some analysts wonder whether the world has left behind an era of falling interest rates and is moving into a period of increased inflation risk.
Morrison’s Paul Newfield, the chief executive of a large investment firm, recently told Interest.co.nz he was not predicting a return to ultra-low interest rates.
A big reason for this was because the world was attempting to de-globalise and various countries were willing to pay extra to bring strategic industries closer to home.
“We all need to be realistic that the idea that the world’s on its way towards a global free market is a relic of the past,” he said.
“Fundamentally, trade restrictions will always be inflationary which is one of the reasons we’ve been wary of predicting a rapid decline in global interest rates”.
Shifting away from fossil fuels will be another long-term inflation pressure, even if renewable energy and low-carbon alternatives work out cheaper in the long run.
As an example, Air New Zealand recently announced it would buy nine million litres of sustainable aviation fuel three or four times the cost of regular jet fuel.
Singapore and the European Union have begun to require flights departing from their airports to use a minimum amount of sustainable fuel. Ticket prices will rise if costs don’t scale down.
This is just one example of how reducing emissions could push up costs. If central banks want to hold inflation at 2% then other prices in these economies will need to be restrained.
Kiwis already expect inflation to be a little on the high-side. Two-year inflation expectations were at 2.5% in a March survey, while 10-year expectations were also slightly elevated at 2.2%.
While the inflation wildfire sparked by the pandemic has almost been tamed, conditions in the global economic forest are forecast to be hot and dry for the foreseeable future.
56 Comments
Investors in the United States faced a nasty shock this week as fresh data showed economic growth slowing and inflation stalling.
It's another huge "coincidence" that energy use radically changed after August 2007 just like jobs, GDP, and everything else. Again, if economy is growing you use more energy regardless of price. If energy use isn't growing, then there is no economic growth. PERIOD. https://youtu.be/6Bu2DHZUd4Y Link
Imagine explaining this dumbnuttery to aliens.
- So, what do you do when prices go up faster than wages?
- Ah, we increase the price of money?
- You do what now?
- Yes. We increase the price of money so that people and businesses with debts have to give more money to banks. This reduces consumption by reducing disposable incomes. This forces businesses to reduce prices or they can't sell their stuff.
- OK. So that does reduce consumption of the people who consume the most?
- No, silly, they have power so we leave them alone. In fact, we protect the value of their money by making the banks give them the money they take off people and businesses with debts.
- So, how does this help you increase the supply of stuff - so that prices go down?
- Errrm, we assume that if prices are going up across the economy, then the economy must be at full capacity - all factories are at max output, all people are employed, and all savings desires are satiated.
- Lol. Is that any of that true?
- No, but our dumbass models only work if we make those assumptions.
- And, does this way of tackling price increases work?
- Not really, but we just keep doing it until something breaks. Then we start the cycle again.
- On our planet, we encourage competition, innovation, and punish businesses that take the p*ss when they get too much market power and start extorting customers
- Wouldn't work here, sorry.
New hire to boss at Palmers gardening store:
- "Sorry, the plant was drying up and so I thought it was thirsty so kept watering it and now the leaves are yellow."
- "Ok, let's stop watering the plant."
- "For how long?"
- "Don't know."
- "Ok, but now it kinda looks like it's dying."
- "No, no, it's fine."
- "The leaves are falling off."
- "Because it has too many leaves, just wait."
- "It's turning brown and drying out."
- "It is just fine, it already had enough water."
- "It is literally dead."
- "Ok, that's a good thing! Now pour a bucket of water on it."
Person suffering cost of living to wealthy person
- "fruit and veg prices are through the ceiling I literally cant afford healthy food"
- why don't you grow your own tomatoes and plant fruit trees. Thats what I did
- if I did that I wouldn't be able to whine to the media and the govt. Govt wouldn't increase my benefit and other handouts unless the media plays the race and poverty cards
- yes but inflation would be lower so your rent or mortgage costs wont go up. Your kids would be more healthy and not end up overweight and at the doctors
- my kids love kfc and fush and chups and fizzies. I can't deny their demands
- oh I give up
- Errrm, we assume that if prices are going up across the economy, then the economy must be at full capacity - all factories are at max output, all people are employed, and all savings desires are satiated.
- Lol. Is that any of that true?
- No, but our dumbass models only work if we make those assumptions.
Just on that note ... We've all heard about the 'non-accelerating inflation rate of unemployment' where the unemployment rate can't go any lower without causing wage inflation? It is basically a theoretical number rather than a hard and fast number. Further, it differs from country to country, and even state to state in the USA's case.
I still hear people, and economists who should know better, quote a rate, e.g. 3.5%, with such certainty that it makes me shiver. These numbers were derived many, many years ago. How valid they were even then remains a subject of much debate.
But to hear them quoted still - at this juncture when I.T. advances has allowed many to work, and work from home!, pushing buttons rather than welding tools or engaged in strenuous activities, where previously they simply couldn't - is bordering on absurd.
Some countries are actively studying whether this unemployment rate should be brought down even further. NZ isn't one of them as far as I know.
Thus 'full employment' could well be overstated based upon this rate. And one should note the RBNZ uses this rate - based on what I know not but I'm 100% sure it'll be way out of date! - when it decides what the OCR should be. Or put another way, the RBNZ slams on the brakes when it may not be needed.
As Hawkeye used to say, "Meatball surgery".
(FYI: Meatball Surgery is the term used to describe the type of surgery performed by the doctors at the MASH units. The emphasis was on performing an adequate job at high speed as opposed to refinement and meticulousness.)
We increase the price of money so that people and businesses with debts have to give more money to banks. This reduces consumption by reducing disposable incomes. This forces businesses to reduce prices or they can't sell their stuff.
Well Jfoe, not sure you will agree, but many will argue that suppressing the price of money has got us into this mess in the first place. While what you're describing is bang on, the only solution appears to be suppressing the price of money forever and a day.
But what will that realistically do the value of our currency, labor, and savings (outside land of course)? The trade-offs don't look particularly good. You're way smarter than the average bear, so how will this benefit us in the long run if we have a never-ending feast of credit-driven consumption and asset price auctions?
Et tu, J.C.?
See my comment below
See also https://en.wikipedia.org/wiki/False_dilemma
Recall also my comments that temporary increases and decrease in taxation can achieve the same results in a far more equitable way. (And that's just one alternative to using the OCR.)
also my comments that temporary increases and decrease in taxation can achieve the same results in a far more equitable way. (
I'm not professing to have the answers. But I think that the tinkering that Jfoe is suggesting is also to blame for our current situation. And what you're suggesting is more tinkering.
Now, it could be tinkering is the only solution. However, I question the ability of our over-lords to tinker to get the desired outcomes. All I can really see is The Cantillon Effect running on all cylinders.
Nor am I professing to have the answers.
But we know using central bank interest rates has massively undesirable effects. And yet central banks & governments persist with them while encouraging the belief there is no better system. Sorry, that's a con. And it's a terrible con because the rich are getting richer while the remaining 95% are going backwards.
Systems work best at an equilibrium. A bit like an vehicle's engine, it performs 'best' at a certain speed. And best is relative. (PDK's 'best' would be a minimum CO2 emissions whereas others would believe 'best' would be at maximum torque, while for others it would be at maximum HP.)
Every time I think about where that equilibrium is, I think of a centrifugal governor, (pictures here: https://en.wikipedia.org/wiki/Centrifugal_governor).
The beauty of such a 'governor' is that it functions completely without human intervention (and ideological biases, and ignorance, feigned or real). And yet even a centrifugal governor can be tweaked from time to time by adjusting the weights. Given that economies are like oil tankers - slow to start, stop and change direction - changes would not need to be made often.
The money supply is affected by taxation. Thus, ignoring this part of the machine when one is trying to establish an equilibrium is just daft. Even more daft when one considers that changes in taxation are far, far more immediate than changes to the OCR.
Take the engine analogy a few steps further. It works "best" when all parts are operating in harmony, whether at low or high speed.
It needs an external energy source. It needs lubrication so as not to seize up. The lubrication (oil) is constantly recycled and flowing, requiring replacement (maybe a top up but not continous addition). It's also stored at the bottom until required. It needs an array of components (diversity) large and small, simple and complex. An engine does not see itself as a separation of parts, it does not value one part higher than another. The smallest bolt is just as important as the complex fuel injection system.
An economy is required to operate similarly. We have an external energy source. We have money as oil. We have people and infrastructure as components. Money needs to flow and recycle through the economy, not be stored at the "top" and in assets, and not be continously added to. The "lowest" person needs to be valued as importantly as the "highest". It doesn't get much simpler than that.
And ultimately it needs to operate in harmony with Nature.
You mean the price of debt. Take the debt away and where's the money?
We increase the price of "assets" so the banks have to create more "money".
On our planet we encourage cooperation, giving and receiving, sharing, the nurture and nourishment of the living environment, of ones inherent worth, wellbeing and gifts for the benefit of all. Wouldn't work here, sorry.
It should come as no surprise to anyone that he still uses yards. RBNZ are numpties who refuse to move with the times.
A lot of other places are reporting and acting on inflation monthly. Yet the RBNZ persists on using data from 6-18months ago to act on decisions about the future. Its like teaching Grandma that she should be texting instead of writing letters.
"It should come as no surprise to anyone that he still uses yards. RBNZ are numpties who refuse to move with the times."
It should come as little surprise that the RBNZ Gov. would parrot U.S. Fed. Reserve talking points....where the metric system has yet to be adopted.
Yet another article about the supposedly 100% correlated relationship between interest rates and inflation.
Can we stop this propaganda now?
Before I get the howls of outrage ... Let me explain.
Let's assume you have a skin cancer on your hand. A surgeon of 100 years ago might say, "We can chop off your arm and the skin cancer will be gone". Good result? It must be - the skin cancer is gone, never to return. But a skin specialist might say, "I'll burn that off with liquid nitrogen but you'll have a small scar". Also a good result? It must be - the skin cancer is gone, never to return.
See the difference? All we ever hear about is the meatball surgery. We never hear about better ways of tackling inflation. When this happens - it becomes propaganda.
It also becomes a misuse of statistics. Wikipedia has this to say:
Ignoring important features
Multivariable datasets have two or more features/dimensions. If too few of these features are chosen for analysis (for example, if just one feature is chosen and simple linear regression is performed instead of multiple linear regression), the results can be misleading. This leaves the analyst vulnerable to any of various statistical paradoxes, or in some (not all) cases false causality as below.
(You can read more here: https://en.wikipedia.org/wiki/Misuse_of_statistics)
Thus we have a complex 'economic machine' with a huge number of multivariable datasets on many operational facets of that machine but we constantly choose just two - inflation and interest rates - to inform us on how we must act.
Am I alone in thinking we're being misled?
(Dan, I am not for one minute criticizing you or your article - just the constant drone on the inflation vs. interest rate correlation that comes from media in general ... and too many of our 'institutions'.)
Even if inflation went to 0%, there has been an adjustment in purchasing power equal to the cumulative inflation increase less the increase in people's income. And inflation has greatly exceeded increases in income. The purchasing power of your future income and your savings has decreased.
And inflation still seems to be hanging around, especially if you consider a real basket of goods that includes accommodation
The biggest threat to the taming of inflation is the printing of more money to meet the country's ongoing expenses, including benefit payments and superannuation.
You only have to see what the result of printing money caused during Germany's Weimar Republic in the early 1920s: the beginnings of uncontrollable inflation and Fascism which resulted in Hitler coming to power in 1933.
But, of course, the lessons of history have no place in the tunnel-vision of today's economists and politicians, and in the recent radical changes made to the schools' history syllabus.
The biggest threat to the taming of inflation is the printing of more money to meet the country's ongoing expenses, including benefit payments and superannuation.
My inability to find an easy-to-understand rebuttal of MMT means that I cannot say you're wrong. On the flipside, looking at the sheer size, cost, and threat of the US budget deficits for comparative purposes, then your claim is quite possibly something the sheeple need to pay attention to.
So my opinion is not much help.
But I think where my 2 cents might be of use is that it's hard to see both base and broad money supply needing to continue to expand for the economic boat to keep an even keel. And expand quite dramatically in the case of NZ. Naturally, if the boomers were to get out there like drunken sailors and spend up a storm like we've never seen, this will go some way to alleviating some short-term stresses.
I wish MMT were the perfect description of everything. On paper, it definitely appears to be. At least for the Anglosphere.
I'm not clever enough to poke holes in MMT or neo-Keynesian thought, but what I do have is the ability to know its limitations in terms of its relevance to our current issues.
Try considering what would happen if the money supply was fixed? Hint: many cryptocurrencies have a finite supply. Imagine going into work to be told you're now getting paid less per hour because money - because of its finite supply - has risen in value overnight. And this occurred every few weeks. Very soon we'd need to re-establish the 1c coin and soon after that 0.1c coin and so on.
Another consideration ... Production = Land + Capital + Labor + Entrepreneurship ... But Labor and Entrepreneurship are created from thin air! Or put another way, don't we need the money supply to increase to reflect the fact that things of value have been created out of nothing?
Try considering what would happen if the money supply was fixed? Hint: many cryptocurrencies have a finite supply. Imagine going into work to be told you're now getting paid less per hour because money - because of its finite supply - has risen in value overnight.
Take what you're describing and think about Nu Zillun. If the savings of (in currency terms) and return from your labor is not a concern because the value of house is increasing at a rate greater than your ability to earn (essentially this is what is happening with increasing the broad money supply), you're going to be less concerned about living paycheck to paycheck.
I think my hypothesis would be bullet-proof if I had the behavioral / attitudinal data analysis to back it up. It would be difficult to disprove.
Take what you're describing and think about Nu Zillun. If the savings of (in currency terms) and return from your labor is not a concern because the value of house is increasing at a rate greater than your ability to earn (essentially this is what is happening with increasing the broad money supply), you're going to be less concerned about living paycheck to paycheck.
What you are describing is the opposite of a finite money supply.
In NZ's case we can argue, and I think you'll agree, that our money supply has expanded too quickly. Far, far too quickly. (I.e. it is not the total that is the concern - it is the rate at which it expands and contracts.)
This has the resulted in those 'with money' being able to gobble up even more assets and inflate prices beyond which those 'without money' can afford. (This applies not just to houses, but everything.) I.e. the rich have become richer.
So who did this? Was it our elected government?
Or was it our unelected RBNZ following some ideology? Or were they panicked? Or did the retails banks scare / convince them into doing this?
Who did this? "We" did this.
Let's look at some history. Before "money" there was simply power of might or fear. How did theft of the commons come about? How did feudalism arise? How did the power of the "masters" arise (kings, queens, emperors, church) arise? All we have now are masters, we just get to elect them, or our elected representatives elect them, in the case of the RBNZ. But our corporations and banks and investment bankers are effectively masters too.
"Give me control of a nations money supply, and I care not who makes its laws." We have simply conflated money with power.
We have a history of enslavement, only now is less overt, and the people don't see it as they get to "choose" their enslavement. We have a history of the people having power taken away from them or unknowingly/unconsciously giving their power away. And now we have those with power, with the money, continuing to extract more.
Economic theory can't solve this and nor can monetary policy, as part of both is the manipulation of aggregate demand, effectively manipulating the power of individuals.
We have a fear based ruling/belief system, same as it ever was, and money is being used to enforce that system. Take covid for example - how many people had the power to know the truth or choose appropriately for themselves - fear of losing their income, guilt and shame based fear, all used against the masses.
You only have to see what the result of printing money caused during Germany's Weimar Republic in the early 1920s: the beginnings of uncontrollable inflation and Fascism which resulted in Hitler coming to power in 1933.
Ah yes. The old Germany's Weimar Republic argument enters a yet another money supply discussion.
Godwin's Law was created for when another German phenomenon enters certain types of discussions.
We need someone to come up with another law to describe when the Weimar Republic's woes enter discussions on the money supply.
If no one has yet, I propose it be called the CoNF law. ;-)
The biggest threat to the taming of inflation is the creation of more debt to overcome the illusion of scarcity, to overcome everyone's fear of not having enough, to meet everyone's demand for more "wealth". FIFY
One could just as easily suggest there is enough money for everyone, there is enough stuff for everyone, there is enough to maintain our necessary community/social infrastructure (health, education, environment), and it's only our pricing mechanisms, our value system, our fear and storing of "value" that is preventing us. In short it's our inherited conditioning and programming.
The Weimar Republic and Hitler's rise to power can't be viewed in isolation. In many ways it was the effect and the causes can be equally contributed to the "Allies".
"The Weimar Republic and Hitler's rise to power can't be viewed in isolation. In many ways it was the effect and the causes can be equally contributed to the "Allies"."
True dat. Many would argue it was 'Merican banks, followed by other banks hosted by the 'Allies', withdrawing credit that started the Weimar Republic's monetary collapse.
While the inflation wildfire sparked by the pandemic has almost been tamed...
Inflation and the associated problems the world is facing today, have not been caused by the pandemic, but by the government's and central bank's overreaction to it.
Edited as per Chris' comment below.
Here are some of the main risks on the geopolitical front. Buckle up for a decade of turbulence unless things change significantly. https://www.foreignaffairs.com/china/axis-upheaval-russia-iran-north-ko…
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